Business and the
international
economy
Chapter 26
The process by which countries are
connected to each other because of the
trade of goods and services
Globalisation
• An organisation that has
operations in more than one
country
Multinational company
1. Information and communication has made it
easier for companies for international expansion
2. Free trade agreements have also assisted
business operations
3. Governments have changed their economic
policies to allow foreign companies to enter
their country
4. Some have also removed trade barriers
Reasons for globalisation
1.
2.
3.
4.
Growth in international trade
Dependency on the global economy
Global recognition of brands
Greater movement of products, services,
people and money
5. Company operating in more than one
country
Characteristics of
globalisation
• Factors that have increased the pace of
globalisation are migration (movement of
people from one place to another) ,
improvement of technology
Growth of globalisation
• A group of countries that trade
with each other and are usually
part of a free trade agreement
Trade bloc
• Countries wanting to trade with each
other form a TRADE BLOC , and
reach a common agreement to lower
trade barriers within the member
countries
• It is an association of 21 countries that
aims to promote free trade and
economic cooperation throughout the
ASIA-PACIFIC REGION
OPPORTUNITIES AND
THREATS OF
GLOBALISATION
• Globalisation affects people and
business in the home country and
the host country
• The domestic country where a
multinational starts/first
establishes its operations
Home country
• The foreign country where a
multinational sets up its
operations
Host country
1. People benefit from a variety of products
available to them at a lower cost .
2. Multiculturalism promotes peace and
understanding
3. Increased cooperation between countries.
4. Reduction in prices leads to greater
exports and incoming foreign currency
Benefits
• People in the home country may lose
their jobs if the country decides to
switch operations to a country with
cheaper labour force .
• This will increase unemployment
rates in the home country
Threats
• Increased globalisation leads to increased
demand of goods and services at the cost of
environmental damage
• It forces companies to conform to a standard
culture, and leads to loss of individual cultures in
the host country
Threats
• These companies have developed because
of their expansion to other countries
• Globalisation offers a wider choice to the
consumers for products and services
• But this may cause problems to the
business in the host country
• How ????????????
Why governments introduce
import tariffs and quotas ?
• Multinational companies are supplying
goods and services at a cheaper price than
the local business.
• Small businesses cannot compete and have
to shut down business.
• Eventually there is loss of jobs
• Unemployment will rise
reasons
• If multinational company takes over
the host country , it can have a
damaging effect on the local economy
.
• That’s why governments try to control
the amount of international trade
•Tariffs
•Quotas
Ways to control trade
• It is a type of tax that is paid on goods
that are imported and exported
Tariffs
• A government may place tariffs on imports
so as to reduce imports into the country .
• Tariff increases the cost of local goods and
have to sell them at a higher price.
• Local businesses will benefit as they will
have less competition
• Governments will also put tariffs on
exports of essential items to ensure
the country has enough of them
• It is a physical limit on the
number of goods that can be
imported and exported .
Quotas
• Quotas on imports benefit local
producers as there are less foreign
goods and they face less
competition
• Exporting countries may suffer as
they will only be able to sell a
limited amount of goods to the
country that has a quota
IMPORTANCE AND GROWTH OF
MULTINATIONAL COMPANIES
• A company that wants to enter
international market usually starts by
exporting its locally produced products to
foreign markets .
• Later it may starts its operations in the host
country by opening branches or having
joint ventures with foreign companies
• For a MNC to be successful , the host
country needs to provide a positive
environment in which the business
can establish and grow.
Economic
factors
infrastructure
Social and
political factors
Operational
factors
Factors required for a positive
environment in a host country
1. Little or no restrictions on foreign
investments
2. Tax incentives and stable currencies
of the host country will help to aid
the MNC’s financially
Economic factors
1. Safety and security in the host
country
2. Productivity of the workforce
3. Skilled workers need to be available
4. Political stability and legal controls
are required
Social and political
factors
1. Good infrastructure such as roads,
transportation and communication
can help firms operate more
efficiently
2. Reliable power supply
Infrastructure
1. Close to the source of material, resources
and sales outlets
2. Cost of factory, lease, space and land
should be considered
3. Reliable supply of raw material and at a
reasonable price is important
Operational factors
BENEFITS TO BUSINESS OF
BECOMING A MULTINATIONAL
• Setting up operations where the raw
materials are easily found can reduce
the transportation costs.
• It can help to lower down the
production costs
Easier access to raw
materials
• If plentiful supply of labour in the
host country is present then it is
likely to be available cheaply
Lower cost of labour
• By selling in many countries ,
businesses can benefit from
economies of large scale
production
Economies of scale
• Mergers and Joint Ventures with
companies in the host country can
lead to increased revenues
Access to bigger markets
• Energy costs and purchase or rental of
a business site may be cheaper in the
host country
Lower production costs
• MNC’s are not dependent on one
market
• Their business may not be badly
affected if one of their markets
decline
Spreading of risk
• MNC’s are able to charge higher
prices for globally recognised
brands
premium pricing
DISADVANTAGES TO A
COMPANY OF BECOMING MNC
• MNC’s have to bring in specialist
workers and managers from other
countries
• This can be more expensive
SHORTAGE OF LABOUR
• This may lead to fewer sales as
products may not be able to meet
customer’s demands
Lack of information about
the local market
• This will make the communication
with the local workforce more
difficult .
• Will lead to more mistakes
• Less efficiency
Language barrier
• They have to be accepted by the MNC
.
Cultural differences
• REGULATIONS LIKE QUALITY
STANDARDS
• This will make it harder for the
MNC’s to operate in the host country
STRICT REGULATIONS
• High level of brand loyalty to the existing
competitors
• Or competitors might retaliate through
marketing tactics
Hostile business
environment
• This will raise the overall cost of
the business
Expensive labour costs
• This can lead to bad publicity
for the MNC
Local opposition or threat
from pressure groups
• The MNC may have to spend a
lot of money on advertising
LITTLE BRAND AWARENESS
• It can affect the profits of the MNC
Currency fluctuations
• This can make the government
decision making slow , and cause
delays for the MNC
POLITICAL INSTABILITY IN
THE HOST COUNTRY
BENEFITS OF A MULTINATIONAL
TO THE HOST COUNTRY
• LOCAL MARKET HAS GREATER
ACCESS TO VARIETY OF PRODUCTS
AS THERE IS MORE COMPETITION
INCREASE IN CHOICE AND
QUALITY OF GOODS & SERVICES
• The fact that foreign country has decided
to invest in host country shows that it has
positive regulatory and economic
environment
IMPROVES THE COUNTRY’S
REPUTATION
• The local workforce will be employed
to work in the MNC’s
Employment
opportunities
• Income generated by the foreign
country is taxable
• It will lead to income for the
government to spend on health,
education
Generates income in the
form of tax
• The MNC may have to invest in
transportation and communication
networks
Improves infrastructure
• New technology and techniques used
by the MNC will be shared with the
local employees
Knowledge sharing
• Imports may reduce .
• Exports will increase as MNC has
global presence and will export its
goods
Improves the balance of
payment
DRAWBACKS OF A MULTINATIONAL
TO THE HOST COUNTRY
• The MNC’S will try to influence the
government policies that affect them
Undue influence on the
government
• MNC’S may be cost efficient
• Local businesses providing the same
goods may suffer
Increased competition
• MNC’s will try to produce products
quickly and cheaply
• And in doing so , may ignore the
environment
Environmental damage
• The MNC’S may pay low skilled workers
low wages
• they may hire experts from abroad
Exploitation of labour
• MNC’S may send back the profit to their
home country
• the host country will be left with little
financial benefit
repatriation of profits
• In the long term, this may lead to
scarcity of resources in the host
country
Exploitation of natural
resources
• Marketing done by the MNC’s can
affect the lifestyle, food habits and
culture of the host country .
Negative social impact
• MNC’s are driven by profit.
• They may not pay much attention to
health and safety if the laws are not
strict
Less sense of social
responsibility
THE IMPACT OF EXCHANGE
RATE CHANGES
• The success of international trade
depends on the exchange rate between
the currencies .
• The main factors affecting the exchange
rates are demand and supply .
• If investors from Argentina want to invest
in Singapore or buy Singapore’s exports ,
then the demand for the Singaporian dollar
will rise
DEPRECIATION AND
APPRECIATION OF AN
EXCHANGE RATE
• Exchange rate can have a significant effect
on a business in terms of sales, costs,
profits
• Changes in exchange rate affect the level
of exports and imports.
• This can have an effect on the whole
economy
• A CURRENCY IS SAID TO
DEPRECIATE IF THE VALUE OF THE
CURRENCY GOES DOWN IN
RELATION TO ANOTHER
• When this happens the exchange rate of the
currency falls
Effect of depreciation of
currency on exporters
IMPACT ON
BUSINESSES
IMPACT ON
IMPORTERS
IMPACT ON
EXPORTERS
• Imports will appear to be more
expensive
• Businesses which rely on imports will
have to pay more
IMPACT ON IMPORTERS
• Exports are relatively cheaper
overseas, this should increase the
demand for them
• businesses which export will benefit
from increased sales
Impact on exporters
• If lot of raw materials and semi
finished goods are imported then it
could trigger inflationary pressure on
the economy
Impact on country
• More demand for its currency ,
thus value of currency rises
• More exports may lead to increase
in balance of payments
• A currency is said to appreciate if
the value of the currency increases
with respect to another currency
Appreciation
Impact on
business
Impact on
importers
Impact on
exporters
Effect of appreciation of
currency on exporters
• Imports will appear to be cheaper
• Businesses selling imported goods or
relying on imported raw materials will
benefit from reduced costs
Impact on importers
• Exports are relatively more
expensive overseas, this may
decrease their demand
Impact on exporters
• Businesses which export may suffer
from reduced sales .
• Then exporters may choose to cut
their prices , reduce output and cut
back employment levels
Impact on exporters
• More imports may lead to decrease in
the balance of payments.
• Local businesses compete with
cheaper imported goods and reduce
costs and selling price .
• This may reduce inflation
Impact on country
• A fall in exports my result in a fall in
GDP and unemployment in the
affected sectors
Impact on country
• An appreciation in the exchange rate
makes it harder to sell overseas.
• Essential items do not generally get
affected by the fluctuations in the
exchange rate